For several years now, it has been a cause of celebration that North America’s growing oil production is making us less dependent on distant and sometimes hostile sources of oil.

The new abundance of oil, dating from the late 2000s, chiefly arose from two factors. The first is the phenomenon of “fracking,” or hydraulic fracturing, a technology by which oil can be liberated from shale-oil formations across the U.S. and Canada. The second is the global appreciation of the immensity of Alberta’s heavy oil deposits, apparently infinite and trailing only the reserves of Saudi Arabia in size.

On the basis of new technologies able to tap long inaccessible shale reserves, the Paris-based International Energy Agency (IEA) declared that the U.S. would overtake Saudi Arabia and Russia for the crown of world’s largest oil producer by 2015.

But those rosy projections are beginning to appear illusory.

In a nutshell, shale-oil deposits are depleting rapidly, far faster than those exploiting these relatively new and not well understood reserves could predict. And Canada’s Athabasca heavy oil, among the world’s most expensive oil to produce, is only barely viable as a commercial proposition. It trades at a steep discount not only to conventional oil but to the more readily accessible and easily transportable heavy oil of Mexico.

Alberta heavy oil is also trapped. It cannot reach beyond the U.S. Midwest market, in the absence of proposed pipeline megaprojects that would take it south to the U.S. Gulf of Mexico coast; west across British Columbia to markets in Asia; and east to European markets using new pipeline connections to Maritimes ports.

It’s time for investors, especially, to re-think the continent’s supposed oil bonanza.

Shale’s fading appeal. At 7.8 million barrels a day, U.S. oil production is higher than it has been in a quarter century. But 29 per cent of that volume is drawn from shale, or “tight oil,” formations.

Shale reserves run dry quickly. They’re much costlier to exploit than conventional reserves. And they require a sustained high world oil price to be viable.

The depletion rate for a conventional oil reserve is typically 50 per cent to 55 per cent in the first two years. For shale reserves, the depletion rate in the first year alone is 60 per cent to 70 per cent.

That explains why drilling is manic in the shale industry. The industry must drill an estimated 6,000 wells a year at a cost of about $35 billion just to maintain current production levels. The cost of drilling a horizontal well required to tap a shale formation runs from $3.5 million to $9 million depending on the shale formation’s complexity. The cost of drilling a conventional vertical well is just $400,000 to $500,000.

That’s a dicey business plan, given the historic volatility of the world oil price that dictates the economics of drilling.

Some experts now think shale-oil production will peak by the end of the decade. Already, many of the richest shale plays have been pumped out. In October, the Organization for Petroleum Exporting Countries (OPEC) predicted that U.S. shale production will peak in 2018, just five years’ hence.

Athabasca’s costly crude. At about $100 a barrel, the world oil price is languishing at roughly two-thirds its all-time 2008 peak, yet that’s still high enough to discourage vehicle use, a drag on oil demand. And Alberta producers get far less than the world price to cover their exceptionally high production costs. Western Canadian Select (WCS), the chief benchmark for pricing Athabasca oil, is currently $58.

In describing the Alberta oil sands as uneconomic in the long term, the co-authors of a recent Deutsche Bank report calculate that Western Canadian producers need a $65 price to lure new investors and keep existing projects going.

The heavily discounted price for Alberta oil-sands crude owes partly to the high cost of extracting and refining it. The oil extraction centred around Fort McMurray is not traditional oil production, of course, but among the world’s biggest mining operations. And separating oil from the gritty sands is only part of the high cost.

The shortage of pipeline capacity to carry Alberta crude to market requires that much of it be transported by train and even trucks, far costlier than sending it by pipeline.

Yet the proposed $7.5-billion Keystone XL pipeline is no panacea.

The Deutsche Bank analysts, in their report, Keystone KL Pipeline: A Potential Mirage for Oil-Sands Investors, estimate that the cost of special lubricants, pumps and other devices for transporting oil along the 1,200-kilometre reach of Keystone XL works out to $18 per barrel. That could negate the higher prices Alberta producers expect to fetch at Gulf coast refineries.

“Decarbonization.” As noted, high North American production volumes depend on high prices to cover the unusually high costs of both shale and Athabasca production. But there are many factors that augur for insufficiently high prices to cover those costs. The new expectation among industry experts is that dwindling demand, rather than dwindling supply, will dictate prices in future.

If the fuel efficiency of motorized vehicles continues to improve at 2.5 per cent per year, global demand will peak and begin to decline in a few years’ time.

Abundant and cheap natural gas has emerged from the shadow of oil to become a dominant source of energy, replacing oil in power plants and as fuel for heating homes and offices. Wind, solar, biofuel and sugar-cane ethanol are among the fossil-fuel alternatives entering the energy mix; and there will be others we don’t yet know of.

Cities and countries, meanwhile — and this includes energy hungry but smog-bound China — are pushing for an end to the ubiquity of carbon in their communities.

Improved energy efficiency and the carbon-emissions targets should conspire to, at the least, cut the rate of demand growth for oil in the wealthiest nations over the next two decades, the IEA says. That seems a conservative estimate, given the population decline now underway in Japan and Russia that soon will characterize Western Europe, as well.

Those factors should dampen the euphoria among producers over the once celebrated Athabasca and shale-oil phenomena. A speculated scenario of falling demand and prices for oil has already discouraged investment in new and existing Alberta oil sands production. And it has cut the share price of Chesapeake Energy Corp., former stock-market darling among the shale-oil producers, by 60 per cent from its 2008 peak.

The early exuberance about shale oil is beginning to look irrational. “I look at shale as more of a retirement party than a revolution,” Art Berman, a former 20-year veteran petroleum geologist at the former Big Oil producer Amoco, told Bloomberg BusinessWeek recently. “It’s the last gasp.”

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